Starwood Hotels & Resorts Worldwide Inc. sued Hilton Hotels Corp. late Thursday, accusing its rival of using stolen confidential Starwood documents to develop a new luxury hotel chain.
The lawsuit, filed in federal district court in White Plains, N.Y., alleges that Ross Klein and Amar Lalvani, two former Starwood executives who joined Hilton last summer, stole more than 100,000 electronic and paper documents containing "Starwood's most competitively sensitive information." "This is the clearest imaginable case of corporate espionage, theft of trade secrets, unfair competition and computer fraud," the complaint alleges. In addition to monetary damages, Starwood is seeking a court order that could, in effect, force Hilton to cancel the rollout of the Denizen Hotels chain, which it unveiled last month.
The lawsuit could imperil Hilton's global ambitions for the Denizen brand, which is aimed at travelers drawn to upscale accommodations with a modern flair. Hilton is in talks with developers in Abu Dhabi, Istanbul, London, Mumbai, New York and Panama City to build the hotels in those locations. Hilton has said it plans to open its first Denizen hotel by 2010.
In a statement, Hilton said it "believes this lawsuit is without merit and will vigorously defend itself. We fully intend to move forward on the development of our newest brand, Denizen Hotels." Messrs. Klein and Lalvani didn't respond to requests for comment.
The suit is an unwelcome distraction for Blackstone Group, the private-equity giant that owns Hilton. Blackstone's overall real-estate portfolio declined by at least 30% during the fourth quarter and 39% last year. Blackstone acquired Hilton for $20 billion in cash at the market peak in 2007, and has said Hilton has performed well. Blackstone declined to comment.
Starwood's allegations set the stage for a battle between two of the world's largest hotel companies, and comes as both are struggling to weather a global recession that has driven down room rates and revenue. The case opens a window into the inner workings of the hotel business, where companies spend years studying consumers, analyzing fashion and social trends, fabrics, room lighting, building costs and food choices.
Thousands of discrete decisions on these matters go into creating a "brand profile." Such profiles, which hoteliers regard as trade secrets, are especially prized in the market for luxury hotels, the industry's most lucrative and competitive segment.Messrs. Klein and Lalvani, who were named as defendants in the lawsuit, were president and senior vice president, respectively, of Starwood's luxury-brand group, which includes the company's highly successful W Hotels chain. Both men allegedly played key roles in expanding and managing the brand's image.
According to Starwood's complaint, Hilton began courting the Starwood executives in February and March of 2008. It was at that time, the suit alleges, that Mr. Klein "secretly misused his position" at Starwood to compile and steal confidential information. The complaint alleges that in their last months at Starwood, the two executives smuggled out thousands of confidential documents via email and in direct shipments from Starwood to their homes and to Hilton.
The allegedly stolen information, it says, has allowed Hilton to exploit the time and tens of millions of dollars invested by Starwood to bring a "competitive hotel chain to market expeditiously," avoiding the "inevitable and costly trials and errors along the way."
Starwood said in its complaint that it learned of its former executives' alleged misdeeds as part of a separate dispute over Hilton's recruitment of eight other Starwood employees. In November, the complaint says, Starwood began an arbitration seeking to prevent Mr. Klein from soliciting former colleagues to join him at Hilton.
As Hilton's in-house legal team prepared for the arbitration, it discovered bundles of Starwood documents in the possession of Mr. Klein and other Hilton employees, according to a letter from Hilton to Starwood included in Starwood's complaint.
Hilton mailed the documents and electronic files back to Starwood, packaged in eight boxes that arrived unexpectedly at Starwood's White Plains headquarters, in early February, according to the complaint.Hilton's general counsel attached a letter to the boxes saying that the material appeared "to be neither sensitive nor confidential" but that Hilton was "returning them nonetheless in an abundance of caution," the complaint says.
Starwood took a different view. Among the information it claims Messrs. Klein and Lalvani took was a concept called the "zen den" that Starwood planned to implement at W Hotels. Hilton executives have referred to the Denizen brand as a "den of zen," the complaint alleges, adding, "within Starwood the name has a familiar ring."
A Hilton executive stressed Thursday that the company voluntarily returned the materials to Starwood after discovering them, and added "the delay in filing of the suit and the failure to engage in any dialogue with us concering the materials and their use belies the 'urgent' nature of this suit." In its lawsuit, Starwood is demanding that Hilton "destroy all documents and information relating to the promotion and rollout of the Denizen brand, which would require Hilton to start over." That could be enough to kill the new brand. Starwood says Messrs. Klein and Lalvani took its "brand in a box" -- or the "blueprints" for launching a new hotel brand. Those blueprints set out how to negotiate with developers, train employees and market the brand, the lawsuit says. It also says the two men stole strategic development plans, marketing and demographic studies and training materials for the hotel company's entire luxury-brand line, including the W Hotels and St. Regis brands. The complaint also alleges that the former executives stole the names and contract details of hundreds of property owners who signed hotel-management contracts with Starwood.
Hotel companies like Starwood and Hilton often don't own hotel buildings. Instead, they rely on investment groups that pay hotel-management companies to brand and operate the hotels.The details of those contracts, including the fee structures and terms, are different for every hotel company and are highly guarded. A hotel company's ability to develop and sell owners on a brand can be worth hundreds of millions a year in contract fees.
The suit alleges that Hilton executives, including Chief Executive Christopher Nassetta "have been approaching owners and franchisees of properties under contract with Starwood and are using Starwood's playbook in competing for those properties."A Hilton executive said it was "naive to suggest" that Mr. Nassetta needed "Starwood and their files to identify members of the ownership and development community."
Source